A layman’s definition of stock trading would be very close to “buying and selling securities.” But, once you scratch the surface, you realize different parameters characterize trading styles. In this article, we explore the most common trading styles. These are in play in financial markets across continents.
Stock trading styles are most easily recognized by the length of time you hold the stock. This time frame ranges from a few seconds to years. Following are the four trading styles that are universal:
- Position Trading
- Swing Trading
- Day Trading
- Scalp Trading
Long term traders adopt this trading style. They hold stocks for long duration (weeks, months or even years). Investors looking to avoid short-term, day-to-day fluctuations of stock markets follow this style. Traders ignore short term market fluctuations. Their trading is not affected by fluctuations in interest rates and government policies. They seek to profit from long-term markets trends. Investors patient enough to stay invested are the best placed for Position trading. It is often used by small investors who invest for decades to create a retirement corpus.
Swing trading targets profit from the swings in charts over days or weeks. This suits traders looking for the first opportunity to book profits. They do have the patience to hold their positions overnight and sometimes for days. Short time market swings can go either way. Investors need to know when to stop their losses and enter another position. Waiting for the existing position to turn profitable is not recommended. They tend to cash out at the first available opportunity – even if it happens within hours of buying. Swing trading is popular with traders who want to make quick profits over a few days or weeks. They depend on technical analysis to know when to enter and exit their investments.
The daily trading session of stock markets spans a few hours. Day trading is when traders look to buy and sell securities on the same day. Day traders depend on daily price fluctuations. Positions are never held overnight. Technical analysis is a popular tool for traders to execute their buy/sell trades. Sharp price fluctuations are uncommon within short time span. Hence, traders invest large amounts to realize their targets. This trading style requires constant monitoring of stock prices which can be stressful. Traders need to be in front of their terminals throughout the trading hours.
Welcome to the riskiest form of trading! Scalp trading aims to profit from minimal price movements. It is the most active form of trading. Given the high risk, losses are inevitable. Traders need to absorb losses and trade actively. Profitable trades are relied upon to make up for the losing ones. Impatience is a virtue that sits well with scalpers. They are prepared to make quick decisions and exit a trade with small profits. They do not hold profitable positions for extended periods. It requires ability to concentrate for long hours to catch the smallest jumps. Scalpers exit quickly from losing trades and stop losses at first sight of a fall. Positions are held for small periods, typically no longer than a few minutes.
People typically design their trading style related to their risk appetite. Thus, you must choose the one that most closely resembles your personality. Once chosen, stick to it even if the results are sub-optimal and give yourself time to get acquainted with it.
Now that you have an overview of different styles, which one suits you the best and why?